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Paying off debt vs. replacing income

Two ways to calculate the amount of life insurance you need

Figuring out how much life insurance to buy can be confusing. There are many ways to calculate how much of benefit you need, and we'll go over the two most popular ways.

Before you start to add up how much of a death benefit you need, you first need to ask yourself why you want life insurance. The two main reason to buy life insurance is because you love someone or have a debt to pay. You don't want to leave the ones you love with debt and you don't want them to lose your income when you pass away. Life insurance is a very affordable way to fill those two gaps and leave your loved ones financially secure. So when you are calculating how much life insurance you need, keep in mind the real reason you are purchasing the policy.

Paying off debt

This calculation is a very easy and straight forward way to add up the benefit you need. Simply take all your debts, add them up, and buy that much of a life insurance benefit. Be sure to include your mortgage, car payments, student loans, credit card debt, and medical debt. Some families also like to increase their life insurance and include a benefit for funeral expenses, funding children's education and weddings, or add in an emergency savings fund.

This is a very popular way to calculate the death benefit you need because it pays off all your debts immediately so that your surviving loved ones can continue to live in the same house, drive the same car and not have to uproot their lifestyle too drastically.

Replacing income

Families use this method of calculating life insurance needs so that your loved ones do not need to change lifestyles after you pass away. This calculation is done by figuring out an amount of money that if you put into a safe investment vehicle, would give you enough interest to replace your current income. Start by figuring out what your monthly income is. You can add up all your bills and the money you put towards savings, retirement investments, vacation funds, kid's education funds and any other accounts that you save for. Take this number and times it by 12 to get a full year's income. Then take your yearly income and divide by the safe interest rate. This will give you the amount of life insurance that you need to replace your income. For example, if your income is $60,000 for the year and your safe investment percentage is 4% you would need $1.5 million dollars of life insurance benefit.

Yearly income divided by investment = life insurance benefit

What is the application process like?

The price you pay for your life insurance plan is based on your age, tobacco use, health and driving record. To get to that rating or price, a few steps are involved.

1. The initial application. This includes your basic information like name, birthday, social security number, drivers license number, and payment method.

2. Pull your medical report, prescription history and send you a short medical questionnaire.

3. Paramed, sometimes. You may receive your rate and offer right away depending on your medical report. If not, the life insurance company will ask for a paramed. This is someone who comes and measures your height and weight and takes a blood sample to be tested.

4. Offer and rating. This is where the life insurance company offers you a price for your life insurance plan.

5. Accept, reject or counter. After you get your rating, you can accept what the life insurance offers or you can reject or change the offer. If you don't like what rating they gave you, you can try the process over with a different life insurance company to get a better rating. You can also lower the amount of benefit you want to lower your monthly premium. Some clients do this because their rated at a lower level than expected and want to save on their monthly premium. So instead of getting the full death benefit at the higher price. They lower the death benefit to save on premium.

6. Issue. After you and the life insurance company agree on plan price and benefit amount, the life insurance company will send your policy to you and have you sign that you are still in the same health and have received your policy.

Want to see how much life insurance is for you?

Make an appointment with a local agent to see what life insurance will cost you. Plan pricing is based on age, tobacco use and plan length term.


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